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U.S. Regulators Warn Banks on Crypto

U.S. Regulators Warn Banks on Crypto

The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. spotlighted weaknesses they identified in the cryptocurrency sector in a joint statement and reminded banks of their safety and soundness obligations.

Even though the statement acknowledged that banks aren't prohibited from doing business with firms that operate within the law, the regulators underlined a few warning signs for those desiring to delve deeper into crypto-related operations.

The prospect of fraud, swindles, and dishonest business practices was spotted in the list of risks, along with stablecoins' susceptibility to bank runs. Uncertain custody procedures for bitcoin firms and imprecise redemption rights are among the worrying aspects cited in the document.

The agencies came to the conclusion that issuing or holding as primary crypto-assets those that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system, is "highly likely to be inconsistent with safe and sound banking practices" based on their knowledge at the time and prior experience.

The authorities continue to adopt a diligent and cautious approach with regard to the present or projected crypto asset-related operations and exposures at each banking institution, "given the severe risks highlighted by recent failures of numerous prominent crypto-asset organizations."

Bank relationships with cryptocurrency businesses have come under increased scrutiny following FTX's well-publicized collapse, which was caused by a run on the exchange's utility token FTT, which Alameda Research, the investment fund closely associated with the crypto exchange, used as collateral for loans.

The Silvergate Bank in California, which has a sizable stablecoin operation and counts FTX as a client, as well as Moonstone Bank in Washington state, which received funding from Alameda Research, have drawn a lot of attention.

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